CORNING INC quarterly report, Q3 FY2020

Corning Incorporated 2020 Q3 Form 10-Q Summary

Business context and reporting period

Corning Incorporated filed its unaudited Form 10-Q for the three and nine months ended September 30, 2020. The company operates through Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, Life Sciences, and All Other. Results were materially affected by COVID-19, including weaker demand, customer facility closures, supply-chain disruption, and cost-reduction actions.

On September 9, 2020, Corning obtained controlling interests in Hemlock Semiconductor Group (HSG) and began consolidating it within All Other. HSG manufactures polysilicon products for semiconductor and solar markets.

Key financial metrics

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Net sales	$3,001 million	$2,934 million	$7,953 million	$8,686 million
Gross margin	$1,001 million	$1,017 million	$2,318 million	$3,181 million
Gross margin percentage	33%	35%	29%	37%
Operating income	$257 million	$365 million	$33 million	$1,159 million
Net income attributable to Corning	$427 million	$337 million	$260 million	$928 million
Diluted EPS	$0.48	$0.38	$0.24	$1.03
Core net income	$380 million	$397 million	$775 million	$1,172 million
Core diluted EPS	$0.43	$0.44	$0.88	$1.30

Q3 sales increased 2%, while nine-month sales declined 8%. GAAP net income increased 27% in Q3 but declined 72% year to date. Core net income declined 4% in Q3 and 34% for the first nine months, indicating that the year-to-date GAAP improvement was substantially influenced by nonrecurring items.

Q3 gross margin was approximately 33%, down from 35% in the prior-year quarter. Nine-month gross margin was approximately 29%, down from 37%. Q3 net margin was approximately 14%, versus 11% in the prior-year quarter; nine-month net margin was approximately 3%, versus 11%.

Cash flow, liquidity, debt, and capital allocation

Operating cash flow was $1,406 million for the first nine months, compared with $1,013 million in 2019.
Capital expenditures were $986 million, compared with $1,602 million in the prior-year period.
Free cash flow, as a defined non-GAAP measure, is not clearly provided in the filing; operating cash flow less capital expenditures was approximately $420 million.
Cash and cash equivalents were $2,514 million at September 30, 2020, compared with $2,434 million at December 31, 2019.
Total debt was $8,078 million, including $7,822 million of long-term debt and $256 million of current debt and short-term borrowings. Total debt was $7,740 million at year-end 2019.
Corning had no commercial paper outstanding and had no borrowings under its $1.5 billion revolving credit agreement.
Debt-to-total-capital was 39%, versus 37% at December 31, 2019; the revolving credit agreement permits a maximum leverage ratio of 60%. The company was in compliance with its debt covenants.
The company paid $587 million of dividends during the first nine months and repurchased $105 million of common stock. Share repurchases were suspended during 2020, and no open-market repurchases occurred in Q3.
Management stated that it expected to maintain a strong cash balance, generate positive full-year free cash flow, and maintain dividend payments.

Material changes versus the prior comparable period

Segment performance: Q3 Specialty Materials sales rose 23% and segment net income rose 59%; Display Technologies sales rose 4% and income rose 6%. Optical Communications sales fell 10%, Environmental Technologies sales fell 5%, and Life Sciences sales fell 13%.
Year-to-date weakness: Optical Communications sales declined 18%, Environmental Technologies declined 18%, Display Technologies declined 5%, and Life Sciences declined 5%. Specialty Materials increased 17%.
COVID-19 effects: Vehicle-production shutdowns reduced Environmental Technologies sales; lab closures and distribution-center execution issues affected Life Sciences; and reduced customer capital spending weakened Optical Communications.
HSG transaction: Corning recognized a $498 million pretax gain on its previously held HSG investment. HSG also recorded a $200 million pretax loss related to a settlement with DuPont, of which Corning’s share was $81 million.
Restructuring and impairment: Corning recorded $733 million of restructuring, impairment, and other charges in the first nine months, including $141 million of severance, $217 million of asset impairment, $245 million of capacity realignment, and $130 million of other charges and credits.
Revenue adjustment: Corning recorded a $105 million cumulative reduction to revenue in Q1 after a customer announced plans to exit LCD panel production.
Expenses: Q3 SG&A increased 30%, primarily because of higher litigation and environmental expenses. Nine-month research, development, and engineering expense increased 22%, largely because of impairment charges.
Tax rate: The effective tax rate was 5.1% in Q3 and 11.3% for the first nine months, compared with 17.4% and 22.6%, respectively, in the prior-year periods. Benefits related to CARES Act net operating loss carrybacks and other tax adjustments contributed to the lower rates.

Guidance, outlook, commentary, risks, and unusual items

Corning withdrew its full-year 2020 guidance in the first quarter because of COVID-19-related uncertainty. Management emphasized preserving financial strength, protecting employees and communities, and meeting customer commitments. It reduced planned annual capital expenditures to approximately $1.4 billion and continued cost-containment and workforce-reduction actions.

Principal risks include the duration and severity of COVID-19, unpredictable demand, customer credit and concentration risk, supply-chain and manufacturing disruption, foreign-currency volatility, pricing pressure, industry capacity, litigation and environmental liabilities, tax assessments, technology and commercialization risk, and the ability to maintain dividends and capital spending plans.

Environmental liabilities were accrued at approximately $78 million at September 30, 2020, compared with $41 million at year-end 2019. Management considered a materially higher additional loss remote.
Remaining Pittsburgh Corning asbestos-plan payments totaled $100 million for 2021–2022, including $50 million due in Q2 2021.
Unpaid severance liabilities were $60 million and were expected to be substantially completed within twelve months.
HSG added approximately $1.07 billion of deferred revenue and $264 million of customer deposits at fair value, creating future performance obligations and repayment requirements.
The carrying value of precious metals exceeded fair market value by approximately $3.2 billion at September 30, 2020, creating potential future impairment exposure if demand or profitability in Display Technologies or Specialty Materials deteriorates.
Management reported effective disclosure controls and no material change in internal control over financial reporting.

Most important facts for investors to verify

Whether the HSG consolidation produces sustainable operating earnings after the unusual $498 million remeasurement gain and DuPont settlement effects.
Whether COVID-19-related demand weakness persists in Optical Communications, Environmental Technologies, Life Sciences, and display markets.
Progress and cash costs of the restructuring, capacity realignment, and research-program impairment actions.
Whether operating cash flow remains positive after excluding tax refunds, customer deposits, working-capital movements, and other unusual items.
Debt maturities, including HSG’s $175 million loan maturing September 8, 2021, and the company’s ability to maintain its dividend while capital spending and debt increase.
Potential impairment of precious metals, goodwill, long-lived assets, and other assets under continued economic or market stress.
Changes in environmental, asbestos, tax, customer-contract, and other contingent liabilities.
Future quarterly results on both GAAP and core bases, with particular attention to the reconciliation of non-GAAP adjustments.